Deck 18: General Equilibrium and Market Efficiency

Question 1

According to the exchange model of production, when two firms are in competitive equilibrium

A)the MRTS for two firms will be equal
B)the marginal products of capital and labor for each firm will be equal.
C)both firms will demand proportional quantities of labor and capital
D)the prices of labor and capital will be at the lowest possible level.

Answer 1

A

Question 2

In the Edgeworth box diagram if the initial allocation of consumer goods is off the contract curve then we can be sure that

A)Both parties can be made better off
B)Trade will occur if allowed and transactions costs are high
C)The initial allocation is unfair
D)The initial allocation is irrelevant

Answer 2

A

Question 3

In the Edgeworth diagram model a doubling of the prices will

A)double the dollar value of each consumer's initial endowment
B)double the quantities of each consumer's initial endowment
C)more than double the dollar value of each consumer's initial endowment
D)decrease the dollar value of each consumers' initial endowment.

Answer 3

A

Question 4

The consumption contract curve

A)Is always a straight line
B)Will always have the same MRS
C)Is the locus of Pareto optimal points
D)Is always negatively sloped

Question 5

According to the text, if a policy is designed to move a production process toward efficiency when pollution exists, the best tax is a

A)Lump sum tax on pollution
B)Progressive income tax
C)Proportional income tax
D)Sales tax

Question 6

In competitive equilibrium

A)The MRS of all consumers is the different
B)The MRT of all producers is the same
C)It is impossible to make anyone better off
D)The MRT of all producers is different

Question 7

An allocation of resources is Pareto optimal if

A)It is possible to make one person better off without making at least some others worse off
B)No further mutually beneficial exchange is possible
C)It is below the contract curve
D)It is possible to make everyone else better off

Question 8

If my MRS between two consumer goods is 6 and yours is 2

A)A Pareto preferred allocation does not
B)A Pareto optimal allocation does not exist
C)We are off the contract curve
D)We are on the contract curve

Question 9

If one is inside the production possibilities frontier

A)More of both goods can not be produced
B)The allocation is not Pareto optimal
C)No one could be made better off
D)The economy is producing beyond its potential

Question 10

In equilibrium with an Edgeworth production box

A)MPK/MPL = PL/PK
B)One is on the contract curve
C)The production of one good could increase without decreasing the production of the other
D)MPK*MPL = PL*PK
E)None of the above are true

Question 11

A Pareto preferred transaction is one where

A)The loser in a transaction loses less than the gainer gains
B)All must gain welfare compared with the pre-transaction position
C)No one loses and at least one person gains in the transaction
D)The consumers must have moved to the contract curve

Question 12

Given an initial allocation of resources that is off the consumption contract curve, in a perfect market environment without externalities and imperfect information,

A)One can end up at any point on the contract curve
B)One can end up at only one spot on the contract curve
C)Both indifference curves could move to a higher level of utility
D)Only one of the indifference curves could move to a higher level of utility

Question 13

According to the invisible hand theorem, as stated in the text

A)Non-market forces can prevent the markets from guiding consumers to the contract curve
B)An equilibrium produced by competitive markets will exhaust all gains from exchange
C)Government interaction is sometimes needed as an invisible hand to lead the economy toward efficiency
D)Even non-competitive markets are able to achieve Pareto efficient outcomes

Question 14

On the consumption contract curve

A)All indifference curves are crossing
B)All allocations are not Pareto optimal
C)There will be no further voluntary exchange
D)There will be further opportunities for exchange

Question 15

If one is on the contract curve

A)The allocation is not Pareto optimal
B)The indifference curves of both consumers are crossing
C)No further voluntary trade will occur
D)Further beneficial trades can occur

Question 16

According to the second welfare theorem

A)The issues of equity and efficiency are tied together
B)The issues of equity and efficiency are separate
C)Equity is unimportant to economists
D)The market also achieves equity for all participants of the economy

Question 17

If one is at a point on the contract curve

A)No other allocation of resources is Pareto optimal
B)Society must have achieved a fair outcome
C)Society ,must have achieve an efficient outcome
D)Society must have achieve an equitable outcome

Question 18

A tax on all goods consumed

A)Would not cause distortions if all consumer goods are taxed at the same rate
B)Would be more efficient than an income tax
C)Would cause distortions between consumer goods and other goods and services
D)Will increase the welfare of all consumers

Question 19

In an economy, which of the following is not a source of inefficiency?

A)Monopoly
B)Public goods
C)Lack of government regulation
D)Externalities above

Question 20

In the Edgeworth box shown below,

A)There is more food demanded than is available
B)There is more clothing demanded than is available
C)The relative prices shown will bring equilibrium without changing
D)There is less food demanded than is available

Question 21

The diagram above shows the general equilibrium model for a small economy.Fort this economy, the economically efficient allocation of resources occurs at point:

A)A
B)B
C)C
D)D

Question 22

What is wrong in an economy when society can transform 1000 apples into a tent or a tent into 1000 apples, but the marginal rate of substitution of apples for tents by consumers is 500? Explain how the market automatically will solve this problem.

Question 23

In the diagram above the following would be a possible explanation for the difference between PPF1 and PPF2

A)a technological improvement in the production of Butter
B)a technological improvement in the production of Guns
C)a dramatic shock to the resources needed to produce Butter
D)a technological improvement in the production of Butter and Guns

Question 24

The rate of which one input can be traded for another at a point along the production possibilities frontier is called the

A)marginal rate of technical transformation
B)marginal rate of technical substitution
C)marginal rate of substitution
D)marginal reduction rate

Question 25

Sketch an Edgeworth production box where the demand for labor is greater than its supply and the supply of capital is greater than its demand.

Question 26

When one party's economic activities on another party is not taken into account by the price system we say to have the market failure of:

A)Imperfect information
B)Externalities
C)Public goods
D)Imperfect competition

Question 27

Graph the problem of Question 35 above and show the solution on the graph.

Question 28

When taxes or subsidies on a particular product are introduced into the general equilibrium model we can be sure that

A)Taxes make the taxed product appear too expensive to its producer
B)Subsidies make the product appear too cheap to its producer
C)We get too much of the subsidized product and too little of the taxed product
D)A more fair allocation of resources is possible

Question 29

Describe what happens automatically in markets to solve these allocation problems.Relate your explanation to markets in general and to the graph in Problem 33 above.

Question 30

Sketch a typical consumption contract curve in an Edgeworth box for you and she.The two products should be apples and tents.Identify two consumption baskets where you and she are off the contract curve.Label the first point (a) where you value apples much more than she does; label the second point (b) where you value apples much less than she does.

Question 31

Compared to PPF1, along PPF2

A)the economy can produce more butter.
B)the economy can produce more guns
C)the opportunity cost of producing butter is more than before.
D)All of the choices are correct.

Question 32

Three main conditions are necessary for general equilibrium to hold in the market economy.The first requires that all consumers are in equilibrium meaning that all beneficial exchanges have been made between them.The second is that all inputs are employed in their best use meaning that costs are as low as possible for everything being produced.The third condition requires that

A)The right mix of goods is being produced
B)The distribution of income is done according to the societal values so that all the contract curves can be reached
C)All citizens are risk averse in large decisions and risk lovers in small decisions
D)Majority voting rules apply to all public decisions

Question 33

According to the General Equilibrium Model an economically efficient allocation of resources:

A)Is also a "fair" allocation of resources
B)Interpersonal comparisons of utility are both important and useful
C)Is that where no welfare-improving trades can be made
D)Can only be achieved with government intervention

Question 34

The diagram above shows the production possibilities frontier (PPF) for a country that produces guns (G) and butter (B). Most people in the country prefer guns, so in the absence of international trade, point A represents the combination of G and B that maximizes welfare. The slope of the PPF at point A is equal to -2, which is the slope if line B'
a.What is the opportunity cost of 1 ton of G before trade? What is the opportunity cost of 1 ton of B before trade?
B. Then, they could sell these extra tons of B in the world markets for $12,000, and use that revenue to buy 6 tons of
G. So, they could make 5 additional tons of G in the process.

Question 35

The diagram above shows the general equilibrium model for X and Y for a small hypothetical economy.Point A in this diagram represents positions where:

A)There is an excess supply of good X
B)There is an excess demand for good X
C)The economy is at an economically efficient allocation of resources
D)Maximizing utility

Question 36

If after the misallocation in Problem 35 above is corrected, a 500 apple tax is put on each tent that is sold, what will happen to the efficient allocation that has been achieved?

Question 37

Given an initial endowment of factor inputs

A)There is only one efficient level of outputs
B)There are many efficient levels of outputs
C)All the outcomes must be efficient
D)All the outcomes must be equitable

Question 38

The slope of the contract curve for two consumers is determined by the

A)Relative prices of goods
B)Absolute prices of goods
C)Marginal rates of substitution of the two trades
D)Income of the two traders

Question 39

When the two-good production and trade models are extended from a given country to the entire world

A)The price of the exported good falls for the country going global
B)The cost of producing the exported good rises for the country going global
C)The price of the imported good falls to the country's consumers
D)The price of both goods rises for the country going global

Question 40

Compare Pareto optimality with the utilitarian view that says we are better off when the overall gain in utility exceeds the overall loss in utility by the consumers.What are the effects of the differences for policy? Can this concept be applied to public goods?

Question 41

You live in a world where the marginal rate of substitution of food for clothing is two and the price ratio between food and clothing is one.Your world also has labor and capital which has marginal products respectively of two and five.The price of capital is ten and the price of labor is 8.Finally, your world can transform two units of food into one unit of clothing or vice versa.Assuming that all the conditions of general equilibrium are present, what will happen in the various sectors of the economy to bring about general equilibrium?

Question 42

Over the long run, do you think this country would be better off by shifting its production towards guns or butter? Please identify the most efficient production point in the PPF with trade. What would be the ratio of the prices at that point?